The Ten Roads to Riches

by Ken Fisher

  Make sure it endures. Star Wars and Harry Potter will be here forever—the themes contained are broad and perma-appealing. Post-it Notes, too. But whoever invented the eight-track tape got bowled over by the next new thing, killing their future royalty stream. We know we will always have politics, so it’s an enduring path.

  Monetize it. Lucas did it with Star Wars figurines. Find something you want to immortalize, ensure it’s got a big enough following or figure out how to build a following like Popeil did, and guarantee your right to it. It needn’t be physical—an experience can be monetized as well. Hearing a catchy tune, forgetting a horrendous spouse, and feeling like “your guy” is there for you.

  Patent it or otherwise protect it. Once you’ve found your niche, made your discovery, penned the novel, or drawn plans for the next great gadget—protect it. Patent it, or otherwise copyright it. Own it. Never sell.

  Filing a patent form isn’t hard. Go to the US patent website (www .uspto.gov/). It will walk you through the process. There are forms you can print and submit, as well as a list of the fees. To copyright something written, go to the US Copyright Office (www.copyright.gov) to download the needed forms. Copyrighting is only $45 per entry.

  Market and merchandise it. Your innovation or invention may be life-changing, but if no one knows about it, you won’t profit. Take another tip from pioneer Ron Popeil and become your own spokesperson.

  Plan for the future. Once you’ve acquired a source of income, learn how not to lose it. Understand the structure of your income—is it guaranteed? For how long? How might your contract be broken? Could something better supplant your creation and hence your income? Keeping your income steady may mean banking some cash flow for a later rainy day. And yes, even making and sticking to a budget.

  NOTES

  1. 3M History, “The Evolution of the Post-It Note,” http://www.3m.com/intl/hk/english/in_hongkong/postit/pastpresent/history_tl.html (accessed April 14, 2008).

  2. Stacy Perman, “He Invents! Markets! Makes Millions!” BusinessWeek (October 3, 2005), http://www.businessweek.com/smallbiz/content/oct2005/sb20051003_862270.htm (accessed April 14, 2008).

  3. Karissa Giuliano and Sarah Whitten, “The World’s First Billionaire Author Is Cashing In,” CNBC (July 31, 2015), http://www.cnbc.com/2015/07/31/the-worlds-first-billionaire-author-is-cashing-in.html (accessed September 15, 2016).

  4. “JK Rowling Profile,” Forbes (September 2015), http://www.forbes.com/profile/jk-rowling/ (accessed September 15, 2016).

  5. Laura Woods, “Dolly Parton’s Staggering Net Worth Revealed,” AOL Finance (January 17, 2017), https://www.aol.com/article/finance/2017/01/17/dolly-partons-staggering-net-worth-revealed/21656680/ (accessed February 28, 2017).

  6. Kelly Phillips Erb, “Marc Rich, Famous Fugitive and Alleged Tax Evader Pardoned by President Clinton, Dies,” Forbes (June 27, 2013), http://www.forbes.com/sites/kellyphillipserb/2013/06/27/marc-rich-famous-fugitive-alleged-tax-evader-pardoned-by-president-clinton-dies/#169805829d9c (accessed September 15, 2016).

  7. The Staff, “Interview with Morris ‘Sandy’ Weinberg, Esq.,” Jurist (March 7, 2001), http://jurist.law.pitt.edu/pardonsex8.htm (accessed April 14, 2008).

  8. Denise Rich, “Denise Rich Biography,” http://www.deniserichsongs.com/bio.html (accessed April 14, 2008).

  9. “Making Money with Your Music,” Taxi.com, http://www.taxi.com/faq/makemoney/index.html (accessed May 12, 2008).

  10. Alison Leigh Cowan, “Ex-Advisor Sues Denise Rich, Claiming Breach of Contract,” New York Times (August 17, 2002), http://query.nytimes.com/gst/fullpage.html?res=9502EED7153DF934A2575BC0A9649C8B63 (accessed May 12, 2008).

  11. Hugh McIntyre, “Paul McCartney’s Fortune Puts Him Atop the Richest Musicians List,” Forbes, May 21, 2015, http://www.forbes.com/sites/hughmcintyre/2015/05/01/paul-mccarnteys-1-1-billion-fortune-helps-him-top-the-richest-british-musicians-list/#7dcaf9136f62 (accessed September 15, 2016).

  12. “The Forbes 400 2016,” Forbes, http://www.forbes.com/forbes-400/list/# version:static (accessed October 11, 2016).

  13. Ibid.

  14. Daniel Gross, “How Hillary and Bill Clinton Parlayed Decades of Public Service into Vast Wealth,” Fortune (February 15, 2016), http://fortune.com/2016/02/15/hillary-clinton-net-worth-finances/ (accessed September 15, 2016).

  15. Stephen Labaton, “Rose Law Firm, Arkansas Power, Slips as It Steps onto a Bigger Stage,” New York Times (February 26, 1994), http://query.nytimes.com/gst/fullpage.html?res=9A05E2DB163AF935A15751C0A962958260&sec=&spon=&pagewanted=all (accessed April 14, 2008).

  16. Council of State Governments’ Survey, January 2004 and January 2005.

  17. Dan Ackman, “Bill Clinton: Good-Bye Power, Hello Glory,” Forbes (June 25, 2002), http://www.forbes.com/2002/06/25/0625clinton.html (accessed May 19, 2008).

  18. John Solomon and Matthew Mosk, “For Clinton, New Wealth in Speeches,” Washington Post (February 23, 2007), http://www.washingtonpost.com/ wp-dyn/content/article/2007/02/22/AR2007022202189.html (accessed April 14, 2008).

  19. Assume half their income saved 1979 through 1992 ($117,500) then $100,000/year 1993–2000, assuming 10 percent ARR.

  20. Robert Yoon, “$153 Million in Bill and Hillary Clinton Speaking Fees, Documented,” CNN (February 6, 2016), http://www.cnn.com/2016/02/05/politics/hillary-clinton-bill-clinton-paid-speeches (accessed September 15, 2016).

  21. Solomon and Mosk, “For Clinton, New Wealth in Speeches.”

  22. Eugene Kiely, “Does President Obama Want a Higher Pension?,” FactCheck.org (May 20, 2016), http://www.factcheck.org/2016/05/does-obama-want-a-higher-pension/ (accessed September 15, 2016).

  23. Kellie Lunney, “Which Ex-President Cost the Government the Most in Fiscal 2015?,” Government Executive (March 21, 2016), http://www.govexec.com/pay-benefits/2016/03/which-ex-president-cost-government-most-fiscal-2015/126826/ (accessed September 15, 2016).

  24. Stephanie Smith, CRS Report for Congress, “Former Presidents: Federal Pension and Retirement Benefits” (March 18, 2008), www.senate.gov/ reference/resources/pdf/98-249.pdf (accessed April 15, 2008).

  25. “The World’s Billionaires Real-Time List,” Forbes, http://www.forbes.com/billionaires/list/#version:realtime (accessed September 15, 2016).

  26. US House of Representatives, “Salaries: Executive, Legislative and Judicial,” January 2015, https://pressgallery.house.gov/member-data/salaries (accessed September 15, 2016).

  27. U.S. Census Bureau 2006.

  28. US House of Representatives, “Salaries.”

  29. Patrick J. Purcell, “Retirement Benefits for Members of Congress,” Congressional Research Service (February 9, 2007), http://www.senate.gov/reference/resources/pdf/RL30631.pdf (accessed May 19, 2008).

  30. “Herb Kohl Profile,” Forbes (September 2016), http://www.forbes.com/profile/herb-kohl/ (accessed September 15, 2016).

  31. Edwin Durgy, “What Mitt Romney Is Really Worth: An Exclusive Analysis of His Latest Finances,” Forbes (May 16, 2012), http://www.forbes.com/sites/edwindurgy/2012/05/16/what-mitt-romney-is-really-worth/#887f7029279a (accessed September 15, 2016).

  32. Roll Call’s Wealth of Congress Index (November 2, 2015), http://media.cq.com/50Richest/ (accessed September 15, 2016).

  33. William P. Barrett, “Sidney Harman Ain’t No Billionaire,” Forbes (August 11, 2010), http://www.forbes.com/sites/williampbarrett/2010/08/11/sidneyharmannewsweekbillionairetrump/2/#11defc3f764f (accessed September 15, 2016).

  34. “Jeff Bingaman (D-NM) Personal Financial Disclosures Summary: 2007,” OpenSecrets.org,http://www.opensecrets.org/pfds/summary.php?year= 2007&cid=n00006518 (accessed September 15, 2016).

  35. “Rudy Giuliani,” Celebrity Net Worth (2016), http://www.celebritynetworth.com/richest-politicians/republicans/rudy-giuliani-net-worth/ (accessed September 15, 2016).

  36. “Olympia Snowe (R-Maine) Personal Financial Disclosures Summary: 2012,” OpenSecrets.org, http://www.opensecrets.org/pfds/summary.php?cid= N00000480&year=2012 (accessed September 15,
2016).

  37. Sean Loughlin and Robert Yoon, “Millionaires Populate US Senate,” CNN (June 13, 2003), http://www.cnn.com/2003/ALLPOLITICS/06/13/senators.finances/ (accessed April 15, 2008).

  38. “Richard C. Shelby (R-AL) Personal Financial Disclosures Summary: 2014,” OpenSecrets.org, http://www.opensecrets.org/pfds/summary.php?cid= N00009920&year=2014 (accessed September 15, 2016).

  39. “Rudy Giuliani.”

  40. Stephanie Condon, “Report: Al Gore’s Net Worth at $200 Million,” CBS News (May 6, 2013), http://www.cbsnews.com/news/report-al-gores-net-worth-at-200-million/ (accessed September 15, 2016).

  41. Patrick J. Reilly, “Jesse Jackson’s Empire,” Capital Research Center, http://www.enterstageright.com/archive/articles/0401jackson.htm (accessed April 15, 2008).

  42. Steve Miller and Jerry Seper, “Jackson’s Income Triggers Questions,” Washington Times, February 26, 2001.

  43. Walter Shapiro, “Taking Jackson Seriously,” Time (April 11, 1988), http://www.time.com/time/magazine/article/0,9171,967157-1,00.html (accessed May 22, 2008).

  44. James Antle, “Tea Party Hero Jim DeMint Is Leaving the Senate—but Not Politics,” Guardian (December 7, 2012), https://www.theguardian.com/commentisfree/2012/dec/07/tea-party-jim-demint-leaves-senate#comment-19917782 (accessed January 31, 2017).

  9

  TRUMPING THE LAND BARONS

  Dream of building skyscrapers? Collecting rent? You could be a land baron.

  America is a land of real estate moguls—homeownership is over 60 percent! Don’t let last decade’s housing crisis dissuade you—there’s huge money in being a land baron.

  Like other roads, it ain’t easy. Successful land barons don’t just have a knack for finding tasty, unappreciated land and willing investors. They have the strategic vision of successful firm founders. Essentially, they are founders. Fail to create a realistic and actionable business plan and you likely won’t do well on this road.

  The truth? Long-term real estate returns aren’t great—just 5.4 percent since 1964.1 Barely beats inflation! How do Sheldon Adelson ($31.8 billion), Donald Bren ($15.2 billion), Sam Zell ($4.7 billion), and “the Donald” ($3.7 Trumpbillions)2 do it? Leverage!

  Learn to love leverage. It super juices return.

  They borrow! Done right, leverage super juices profit. Done wrong, losses and humiliation are massive—beyond total. Isn’t borrowing risky? Sure, if you do it wrong. But this road requires leverage. If you’re debt-averse, stop now and flip to another road. Otherwise, overcome your debt fears. Learn to love leverage to achieve land baron success.

  THE MAGIC

  Here’s how the magic works: Suppose you put down 5 percent on a $100,000 property—$5,000. In five years, you sell for $125,000. Ho hum—a 25 percent gain, just 4.6 percent annualized. But no! You tied up only $5,000—that $25,000 gain is actually 500 percent and 43.1 percent annualized. Magic! Yes, you had interest payments on the debt—we’ll get to that. And if the value fell, you would lose your $5,000. Leverage goes both ways. The key is finding a good value you can monetize that others don’t want. You must turn property into a money-rendering machine by monetizing it.

  MONETIZE IT

  Here’s how. But first, a disclaimer: I’m no land baron. Yes, I own real estate, mostly buildings my firm uses. But it’s my wife, Sherri, who’s the family land baron.

  In 1999, two men bought 1450 Fashion Island Boulevard, a then 15-year-old, 104,000 square foot Class A office building in San Mateo, California, at the intersection of freeways 101 and 92—the crossroads of the San Francisco Peninsula connecting San Francisco to Silicon Valley and the Peninsula to the East Bay. Prime location—almost no vacancies in 1999. They paid $31 million, borrowing $25.5 million via a note from Credit Suisse First Boston Mortgage Capital LLC. Silicon Valley was booming, rents were high, office buildings were full, and dot-coms, flush with cash, were leasing expansion space they’d eventually never need (but they didn’t know that then).

  My firm was growing. Five years earlier, Sherri had built what was our headquarters in midnowhere on a Bay Area mountaintop, 2,000 feet high, a spot you’d never suspect. A jewel in the forest, surrounded on three sides by thousands of acres of government-owned open space—clear air and miles of Pacific Ocean views. She expanded it twice, but by 2000 we’d filled the postage stamp–size flatland atop this spectacular mountain. We needed more space elsewhere. Sherri chose San Mateo—20 minutes away. Rents were high and space tight. She couldn’t lease much. But as the tech bubble burst, sublease space became available. By 2002, she could get one-year leases for all the Class B office space she wanted at OK rates.

  By 2004, 1450 Fashion Island Boulevard was in default, foreclosure proceedings had begun, and a new receiver was appointed. The men who bought it owned other office buildings—all levered and on the ropes. They had nothing to plow back into 1450 to attract tenants, so 1450’s vacancy rate kept rising. Their anchor tenant left, leaving them in a tough spot. The note holder decided to sell out in a closed auction, where bidders wouldn’t know what other bidders bid. Potential buyers would submit initial indications of interest in broad terms, and from that group, the seller would determine a smaller group allowed to make one hard final bid. The seller needn’t sell to the highest-priced bid. A somewhat lower price might be better if it had better terms.

  Terms are as important as price. Terms mean how much of the price is cash, interest rate on any noncash offer, a deposit to go with the bid, whether or not the seller keeps the deposit if the bidder backs out, and what legitimate reasons might let you back out. (For example, usually bidders specify building inspections to their satisfaction, or they can back out.) Also, speed of closing—how fast you can close—is important, because sellers prefer a fast close. (Faster means less risk to the seller.) Institutional buyers often have internal procedures they must follow that may limit their speed. The seller assesses all these terms.

  By then, we had 400 San Mateo employees on one-year leases and were growing fast. Short-term leases leave you vulnerable to rent hikes if the market tightens. Sherri wanted to buy 1450’s note, then as note-holder, foreclose and take over the building. (Don’t ever mess with my wife; it’s painful.) She figured with my trading background—horse-trading, if you will—I might negotiate the auction better than she. Our general counsel, Fred Harring, oversaw the nuts and bolts, because he’s hell on details in any transaction. I’m more of a big picture guy.

  One lucky presumption turned out right—that all other bidders would be financial firms seeking a rate of return based on pricing the note at existing rents and vacancy rates that couldn’t be improved much in that high-vacancy market. But I could fill the building—with my own employees. They couldn’t. I could pay more because I could monetize that vacant space. It was a year after 2003’s stock market bottom. The recession was recent. Tech was reeling. Based on rents, vacancy rate estimates, and interest rates, Sherri guessed financial bidders couldn’t pay much more than $14 million.

  To win, I needed an initial indication of interest motivating them to keep me in the game so I could make that final, hard bid. That may seem trivial, but institutional sellers prefer institutional buyers to individuals like me. They weed out individuals, seeing us as likely to be loose cannons, prone to go off in strange ways—like litigation. They hate that. I had to offer sweetheart terms.

  So I did. My initial price was $13.5 million—OK, but unlikely the highest. I needn’t be highest at first; I just had to make it to round two. But for terms, I promised all cash and a deposit totaling a third of the price—all of which they would keep if I won but didn’t close. That’s huge. Usually in a deal this size, institutions offer maybe a $500,000 to $1 million deposit. So if I won and backed out, they would keep my $4.5 million and could resell the note—coming out way ahead for having tolerated me. Further, I required no inspections. Sherri figured the institutional lenders on the $25 million note five years earlier had almost certainly done every inspection known to man. And
to her nose, nothing had changed. I also promised to close any time they wanted.

  Having offered dream terms, we got to round two. Here, I kept everything identical but notched my price to $15 million, just over that $14 million number. I don’t know what others bid, but we won. Note in hand, Sherri threatened to foreclose on the building owners, something few note-holders do—way too messy. Because Sherri does messy for breakfast, usually washed down with nails and bolts, the owners instead gave her the deed in lieu of foreclosure.

  Financial note buyers don’t like owning buildings—they just want a good return on their note. They can’t manage buildings or fill them with tenants. We could. That was our monetizing advantage. Sherri spent almost $3 million improving the inside and moving our people in—all in all, an $18 million investment. With leases between my firm as tenant and me as owner, I now received cash flow on a full building. Sherri turned around and got Goldman Sachs to lend us $25 million based on the leases. Sherri pulled $7 million net from the transaction—39 percent over her $18 million—and reaped a tidy profit when she sold the building a few years ago. That’s a land baron’s game.

  You can’t do this unless you have cash and tenants. But you can find a building, find someone with tenants, find financing—then put together a deal that creates wealth. That’s the game.

  THE FOOL’S BARGAIN

  Folks fool themselves. Soaring pre-2005 home prices led to widespread overconfidence. If you owned a home someplace hot, like California from 2000 to 2005, and prices doubled, that didn’t make you smart—just lucky. A good land baron is daring, but doesn’t self-delude.